Markets Today: Hesitant

Markets ended the month of May in a cautious mood amid mixed US data and a Guardian poll that suggested Britain to be more in favour of leaving the EU.

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Markets ended the month of May in a cautious mood amid mixed US data and a Guardian poll that suggested Britain to be more in favour of leaving the EU.

US and European equity indices ended the day marginally in the red. Oil prices climbed over $50 and then quickly retreated while in currencies the USD had a mixed night, losing ground against the NZD and AUD, but outperforming GBP and oil linked currencies.

US income spending beat expectation in April, jumping to 1% vs 0.7% expected, but consumer confidence fell in May and the Chicago PMI also disappointed. A rebound in spending was expected given the constrained spending in March due to Easter seasonal, but the drop in the Conference Board’s measure of May consumer confidence to 92.6 from 94.7 triggered a bigger negative reaction, particularly given the solid print by the Michigan consumer reading on Friday. The Chicago PMI slipped to 49.3 in May from 50.4 previously and along with other soft regional PMI prints it has raised the expectations of a weak ISM print tonight.

US Treasury yields had a volatile session moving higher initially, then losing ground after the data releases. Month end buying was probably also a factor. Relative to Sydney closing levels, 2y UST yields have ended day 4.5bps lower at 0.879% and 10y UST are about 2bpps lower at 1.84%.

Looking at g10 currencies, the NZD is at the top of the leader board (-1.02%) followed by the AUD (0.64%). Gains in the NZD were not driven by data releases while for the AUD most of the gains over the past 24hrs reflect the positive reaction from the better than expected net export figures released yesterday. The GBP sits at the bottom of the leader board, down 0.98% against the USD following a Guardian poll showing voters leaning towards Brexit. CAD (-0.47%) and NOK (-0.31%) also underperformed with the moves consistent with a sharp drop in oil prices in the later part of the session.

Oil prices initially traded over the $50 mark, but in a somewhat belated fashion, prices followed the drop in equities and US yields. The lack of expectations of any agreement on drop in supply at the OPEC meeting this Thursday is probably also a factor at play.

Looking at other commodities, Gold ended marginally higher (+0.1%) ending a nine day losing streak. Iron ore was practically unchanged at %50.2 and copper slipped -0.5%.

Coming Up

It is a busy day of data releases both domestically and in offshore markets.

In Australia this morning we get the Q1 GDP growth number and after yesterday’s larger than expected net export contribution (1.1% vs 0.7%) our economists now expect GDP to print at 1.1%qoq. Looking at Bloomberg, the median of 26 estimates is at 0.8% and NAB is one of two at the higher end of the spectrum. Our expectation for a strong number is largely driven by net exports with only a negligible contribution from domestic demand.

A strong headline number, as we expect, could provide a boost to the currency and trim expectations of future RBA rate cuts.  However, attention should also be given to domestic final demand; a weak number could have a dampening effect on any initial positive reaction.

Ahead of the GDP release, we get the AIG performance manufacturing index and CoreLogic RP Data House prices, both for May. The NAB online retail sales index is also due out this morning and this afternoon the RBA prints its commodity index for May.

Looking at other markets, it is mostly all about activity readings. This morning NZ publishes its Q1 terms of trade and QV houses prices (May). Japan gets its Q1 capital spending and company profits along with its final Markit Manufacturing PMI reading for May. Also this morning, China publishes official PMIs (Manufacturing 50 exp vs 50.1) and Caixin manufacturing PMI (49.2 vs 49.4).

In Europe, final manufacturing PMIs (May) are due for Germany and Eurozone while the UK get its first May reading. On the other side of the Atlantic, the US releases its ISM Manufacturing reading for May, April Construction Spending  and the Fed publishes its Beige Book also for May.

Lastly, early in the week a Nikkei article suggested Japan’s Abe government could formally announce a postponement of the sales tax today and importantly for New Zealand we have a global dairy auction in the early hours of Thursday.

Overnight

On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -0.52bp to 1.85%. On commodity markets, Brent crude oil -0.14% to $49.57, gold+0.1% to $1,215, iron ore -0.2% to $50.15. AUD is at 0.7233 and the range was 0.7232 to 0.7235.

Good luck.

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